Small Business Owners Struggle with Retirement Prep

A recent survey of professional financial advisers,
conducted by CNBC and the Financial Planning Association (FPA), shows 42% of
advisers believe their small business clients’ biggest financial challenge is
developing a retirement plan and business ownership exit strategy. This is
distantly followed by managing cash flow, cited as the top client concern by 23%
of advisers in the CNBC/FPA survey. Other concerns cited as the top worry among small business
owner clients included business tax issues (14%), securing affordable health
insurance (6%) and raising working capital (6%).

The CNBC/FPA survey also revealed
less than one-third of small business owners have worked with their adviser on
a business ownership transition plan. And even among those that did, only one
in four small business owners meet with their adviser to review their plan at
least quarterly.

CNBC and FPA researchers suggest this lack of focus on retirement
and succession planning may prove extremely problematic for the typical small
business owner upon retirement. On average about 70% of a small business
owners’ personal wealth is invested in their business, with only 30% of wealth invested outside
their firms. This suggests many small business owners could come up short on
retirement income without an effective strategy for extracting equity from their
business ownership stakes.

For
many professionals who own a business, selling that business in the
wrong environment may not provide the financial means necessary to adequately
fund their own retirement. In addition, selling may not be in the business owners’
best interest, depending on a long list of economic factors. Other recent research
suggests this is an especially prevalent problem among independent financial
advisory business owners, who tend to significantly over-estimate the price they will be able to fetch from a future buyer of their practice (see “An Alternative to Traditional Succession Planning”).

The CNBC/FPA survey highlights the fact that more
than half of the respondents (54%) felt their small business owner clients did
not have enough protection against unanticipated risks, such as the owner’s
sudden disability or death. Just 28% felt their clients were well protected.

Among those small business owners that have retirement plans
in place, the most popular vehicles among small business clients polled are
profit sharing 401(k)s (54%), followed by SEP IRAs (19%) and SIMPLE IRAs (12%).

The survey also shows financial advisers are using an array
of insurance products to mitigate potential risks, including disability
insurance (81%), liability insurance (73%), key man insurance (70%), health
insurance (63%), property/casualty insurance (56%) and business interruption
insurance (37%). Forty-seven percent of advisers who took the survey noted that
only 20% of their clients had any succession plan in place to ensure a smooth
management transition.

Financial advisers who participated in the CNBC/FPA survey
pointed to three key initiatives small business owners and their financial
planners should follow in order to secure their financial future. These are diversification,
“prepare for the worst,” and “plan for succession.”

The
CNBC/FPA survey was conducted May 12 to June 3 by the Financial Planning
Association. It sampled 178 financial advisers nationwide that service small
business clients ages 35 to 70. More information about the survey results is available here.